Water agency's debt for lifetime medical benefits climbs to $545 million

Southern California's largest water agency has accumulated an estimated $545 million in debt because of an uncommon retirement benefit it has promised employees: lifetime medical care. The cost will eventually be passed on to millions of Southern California water consumers.

If employees work at the Metropolitan Water District of Southern California for at least 10 years, the agency covers half of their medical insurance bills in retirement. If they work 20 years, it covers the entire cost.

And until last year, the benefit was even sweeter. Employees hired before 2012 got all their medical insurance bills in retirement paid by the district if they worked at least five years. The agency scaled back that offer through labor negotiations to reduce costs.

Lifetime medical care has become unusual among public agencies, in part because the cost to taxpayers or ratepayers can be significant. Life expectancy after retirement and health care costs have been rising.

Together, these factors have placed additional pressure on the agency's $1.5 billion budget and water rates across the region. The agency's retiree health payments grew from $8 million in 2006 to $12.7 million last year.

And in addition to these upfront costs, the benefit has created a growing mountain of future obligations.

The district has historically reduced upfront costs by passing the buck to future ratepayers. But the agency hasn't been setting any money aside to cover the medical benefit that current employees will be receiving in retirement.

In 2005, the agency estimated it would be required to pay about $310 million in future medical bills. By 2011, the debt had grown by 76 percent, to $545 million.

Then, in September last year, a financial consultant said the debt might've grown by an additional $30 million. As long as the agency didn't change its practices, he said, the burden on future ratepayers would continue to grow.

Today, water bills across Southern California are playing a small role in the water agency's long-term strategy to pay its debts.

The district has started pumping money into an investment fund that aims to generate revenue for future medical bills. It set aside $5 million this year and plans to gradually increase the amount to $25 million by 2017.

These annual contributions place more stress on the agency's current budget and water rates, but the agency expects it will lower pressure in the long run. If its investments perform well on Wall Street, less money could need to be drawn from the operating budget for retiree health care.

The agency's operating budget is funded mostly through water sales. Smaller water agencies purchase its water and then sell it to roughly 19 million people across Southern California. When the agency increases water rates, the pinch generally trickles down through the chain to ratepayers.

When the agency increased water rates this year, a small fraction of the hike was attributed to the rising cost of retiree health care and the agency's plan to address it, said Gary Breaux, its top budget official.

The district's rates climbed by 5 percent. Breaux said about 0.25 percent of the increase would provide additional funding for the investment plan.

Breaux said that beginning to fund the benefits is important and should reduce the debt over the next decade. At least for the near future, tackling the benefits' cost through other means would be tricky.

As with pensions, the agency agreed to its retiree health care benefits through labor negotiations. If it wanted to change them for existing employees, it would need labor's blessing to reopen contract discussions. That's normally a very tough pitch.

The agency's four labor contracts aren't set to expire until 2015 and 2016.

Keegan Kyle is an investigative reporter at The Orange County Register. He covers public safety and local government issues. What should he write about next?

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